Employee’s position if employer becomes insolvent

If an employer has payment difficulties or becomes insolvent, it almost always has an effect on the employees’ position. Payment difficulties may lead to delays in the payment of wages and salaries, or payments may cease altogether. It is vital that employers keep their personnel updated in financial crisis situations on how the situation will affect the employees.

If employees’ salaries cannot be paid, wage claims should be instantly made through pay security. The pay security system safeguards employees’ salaries in case of employer insolvency.

Employer's company reorganisation

An employer may opt for company reorganisation due to insolvency or impending insolvency. Employees’ contracts will remain as they are unless they are terminated. During the company reorganisation process, the employer may under certain conditions observe a two-month period of notice regardless of the length of the contract.

Primarily, the employers should be able to normally pay the salaries incurred after the start of the company reorganisation process. Moreover, the employer should be able to pay all holiday pay and remunerations preceding the company reorganisation process up to three months. If this is not the case, a pay security claim should be made.

Employer's bankruptcy

An insolvent employer may be declared bankrupt by the employer or a creditor. The bankrupt's estate is seen to by a bankruptcy trustee appointed by the court. After a company has been declared bankrupt, the bankruptcy trustee will usually terminate employees’ contracts observing a special 14 day period of notice.

In a bankruptcy, there are nearly always unpaid employee salaries. The bankruptcy trustee may make a pay security claim on behalf of the employees if the trustee and pay security authority deem the claim clear enough. Otherwise, the employees must make the pay security claim themselves. Additional information is provided by the pay security authority.

Pay security

The purpose of the pay security system is to ensure payment of employees’ claims arising from an employment relationship in the event of the employer’s insolvency. A pay security application may be submitted by the employee or the employee organisation. When the employer has been declared bankrupt, pay security may also be applied for by the administrator of the bankrupt’s estate.

An employee is entitled to pay security if:

  • the claim is based on an employment relationship
  • the pay security application has been submitted within three months of its falling due
  • the employer is insolvent
  • the claim is uncontested in terms of its amount and grounds.

The maximum amount payable as pay security is 19,000 euros. An employee with claims based on a working time bank is however entitled to pay security corresponding to six months’ wages or salary.

Pay security applications are considered by ELY Centre Uusimaa but the application may also be submitted to a TE Office. The state collects the amounts paid as pay security from the employer. ELY Centres are responsible for collecting the state claims.

The pay security is collectively funded by employers through unemployment insurance contributions. The Unemployment Insurance Fund compensates the state annually for the difference between capital paid as pay security and capital collected from employers.

Supplementary pension benefits based directly on the supplementary pension system and employer’s insolvency

An employer may have promised an employee supplementary pension benefits to be managed and paid by the employer. The employer has a duty to safeguard at least half of the supplementary pension corresponding directly to the amount of supplementary pension arrangement in case of the employer's bankruptcy or company reorganisation. This duty is called the safeguarding obligation.

An employer may enforce the safeguarding obligation by taking out an insurance policy, by depositing collateral or by some other comparable way.

Further information:

Law-drafting: Nico Steiner, nico.steiner(at)gov.fi; Johanna Ylitepsa, johanna.ylitepsa(at)gov.fi